360  Analyzing the Results
• Is the company in a steady state by the end of the explicit forecasting period? 
Following the explicit forecasting period, when you apply a continuing-
value formula, the company’s margins, returns on invested capital, and 
growth should be stable. If this is not the case, extend the explicit fore-
cast period until a steady state is reached.
Are the Results Plausible?
Once you are confident that the model is technically sound and economi-
cally consistent, test whether the model’s valuation results are plausible. If 
the company is publicly listed, compare your results with the market value. 
If your estimate is far from the market value, do not jump to the conclusion 
that the market price is wrong. If a difference exists, search for the cause. For 
instance, perhaps not all relevant information has been incorporated in the 
share price—say, due to a small free float or paucity of trading in the stock.
Also perform a sound multiples analysis. Calculate the implied forward-
looking valuation multiples of the operating value over, for example, earn-
ings before interest, taxes, and amortization (EBITA). Compare these with 
equivalently defined multiples of traded peer-group companies. Chapter 18 
describes how to do a proper multiples analysis. Make sure you can explain 
any significant differences with peer-group companies in terms of the compa-
nies’ value drivers and underlying business characteristics or strategies.
Sensitivity Analysis
With a robust model in hand, test how the company’s value responds to 
changes in key inputs. Senior management can use sensitivity analysis to pri-
oritize the actions most likely to affect value materially. From the investor’s 
perspective, sensitivity analysis can focus on which inputs to investigate fur-
ther and monitor more closely. Sensitivity analysis also helps bound the valu-
ation range when there is uncertainty about the inputs.
Assessing the Impact of Individual Drivers
Start by testing each input one at a time to see which has the largest impact on 
the company’s valuation. Exhibit 17.2 presents a sample sensitivity analysis. 
Among the alternatives presented, a permanent one-percentage-point reduc-
tion in selling expenses has the greatest effect on the company’s valuation.1 
1 Some analysts test the impact of both positive and negative changes to each driver and then plot the 
results from largest to smallest variation. Given its shape, the resulting chart is commonly known as a 
tornado chart.

Sensitivity Analysis  361
The analysis will also show which drivers have a minimal impact on value. 
Too often, we find our clients focusing on actions that are easy to measure but 
fail to increase value by very much.
Although an input-by-input sensitivity analysis will increase your knowl-
edge about which inputs drive the valuation, its use is limited. First, in-
puts rarely change in isolation. For instance, an increase in selling expenses 
should, if managed well, increase revenue growth. Second, when two inputs 
are changed simultaneously, interactions can cause the combined effect to dif-
fer from the sum of the individual effects. Therefore, you cannot compare a 
one-percentage-point increase in selling expenses with a one-percentage-point 
increase in growth. If there are interactions in the movements of inputs, the 
one-by-one analysis would miss them. To capture possible interactions be-
tween inputs, analyze trade-offs.
Analyzing Trade-Offs
Strategic choices typically involve trade-offs between inputs into your valua-
tion model. For instance, raising prices leads to fewer purchases, lowering in-
ventory results in more missed sales, and entering new markets often affects 
both growth and margin. Exhibit 17.3 presents an analysis that measures the 
impact on a valuation when two inputs are changed simultaneously. Based on 
EXHIBIT 17.2  Sample Sensitivity Analysis
29
26
14
11
8
1 percentage point permanent reduction in selling expense
1 percentage point increase in price each year for next 5 years
1 percentage point increase in volume each year for next 5 years
1 percentage point reduction in the operating tax rate
5-day reduction in inventory
Margin
Taxes
Growth
Growth
Capital
Driver
Change
Valuation impact, $ million
EXHIBIT 17.3  Valuation Isocurves by Growth and Margin
15
10
5
0
11
12
13
14
15
v = $456 million
v = $365 million
Current performance
EBITA margin, %
7-year revenue growth, %
16
–5
10